Prospects of European Contract Manufacturing - Survival Merely in Becoming an Exot or an Affiliate?

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Gerpisa colloquium, Berlin (2010)

Résumé:

The proposed paper addresses problems of the European car industry, more precisely problems and challenges of a certain segment of the automotive sector: the contract manufacturers. Several sector surveys underlined the very promising future for this segment of the car industry. Actually, the development of all European contract manufacturers during the last five years tells us a different story. On the basis of case studies it will be explained under what conditions the companies in this segment stay competitive and survive - or fail. Two hypotheses will be put forward:

1.)The power structure in the car industry changes very much: In face of the period of crisis, the OEM take over power which has serious consequences for the supplier industry and their employees (industrial relations). Uncertainties rise and new strategies have to be found.

2.)It seems as if the contract manufacturers can only survive by becoming an “exot” or an affiliate (“Japanization”). It is no longer possible to compete as an individual and independent contract manufacturer producing low volumes.

The paper will explain the consequences of the changing power structure in the automotive value chain and its architecture. Furthermore, it will develop scenarios for the future development of niche and low volume production and show that carmakers have to find new strategies, adopt completely different perspectives on competitors and cooperation partners.

Hence the aim of this paper from a theoretical point of view is to show the limits of institutionalist approaches and the need to broaden or modify these approaches in the face of serious transformations of the economic surrounding and transformations of the market. Maybe the diagnosis could be transferred to other sectors or market structures. The empirical contents of this paper will support the assumption of serious transformations and their complexity. To a certain degree behaviour and decisions of economic actors are expected to be rational or the result of figure-based analysis summing up the situation. The paper will show, that – at the latest – the complexity of the business environment does not make it possible to act and decide (completely) rationally; economic rationality could instead be used as an auxiliary tool to legitimate the decisions of an economic actor. As mentioned above not the whole automotive industry will be covered but a small sample that might be eligible to picture the complex framework of mechanisms that restricts, promotes or undermine the actor’s behaviour.

The case studies base upon media reports, business reports and interviews with decision makers of these companies and actors in the company’s environment as the major source. The aim is to explain corporate decisions and strategies as well as the dramatic changes affecting the market segment. The case study focuses on following figures: changes of business sections, company size, company locations, foreign investments, co‐operations among suppliers and contractors.

Summarizing the main characteristics for the segment of niche producers resp. contract manufacturers they mainly produce for the premium sector, the production is labour intensive, needs specialized knowledge, expert knowledge to create unique selling points. All contact manufacturers have a long tradition in their home countries and no or few production sites abroad. To reduce complexity, a simple picture is drawn: The car industry evolved during the last century from small factories that produced the first cars mainly hand-crafted to huge corporate groups with a very high employment volume (compared to other parts of the industrial sector). Although each region of the Triad has its own specialities regarding the production models, generally speaking similar developments can be identified in Europe, North America (mainly the United States) and Japan (later: Southeast Asia) after the Second World War. Common is especially one characteristic feature: The automobile is a very complex and labour intensive good – the Original Equipment Manufacturers (OEM) are the key players in the sector but do not build a car on their own why a more or less differentiated supplier industry is needed for the production of an automobile. In the Japanese car industry supplier companies are mostly affiliates of the OEM (like Toyota for example), which is a small deviance to the organization of the automotive value chain in Europe or North America.

Of course, one can also identify a strong dependency of supplier companies on the OEMs. Insofar a picture of great interdependence between international companies arises. The same is true for the European “contract manufacturers” as a special segment of the automotive industry but very much subject to the OEM. Contract manufacturers are developing and producing cars on behalf of large automotive producers, the OEMs. They are capable of fulfilling all tasks required to produce a vehicle. In this regard, these companies can be viewed as “miniature” car manufacturers or “small” OEMs. In addition, most of these companies are market-leaders for the production of specific supply modules. Similar to a magnifying glass this approach should help to point out and analyse important structural changes and actor’s behaviour within this changing environment. Summing up the following aspects are important for the case studies in this paper:

-High degree of internationalization.

-High relevance of Central and Eastern Europe

-Interdependence between OEM and supplier, OEM and contract manufacturers.

-Importance of workers’ councils and trade unions.

-Importance of the sector with regard to the whole producing sector of a national economy.

-Large assembly lines and a multiplicity of automated production steps, but the need for (highly) skilled workers, manpower and engineering capabilities to compete in the sector.

-The need to develop new technologies, innovate and invent forces the companies to invest in research and development divisions.

The recent crisis of the automobile industry just shows the tip of the iceberg. Even if the bankruptcy of famous automobile companies is on everyone’s lips in the light of the current economic crisis, the crisis in the automotive sector is not a new phenomenon: Automobile companies have faced several severe problems during the last two decades. Their economic drawbacks are mainly caused by changing circumstances on buyer’s and seller’s markets and consequently huge overcapacities. The paper addresses consequences of these "revolutions" for the contract manufacturers.